Thoughts on Stablecoin and Hayek Comparison

If you’ve ever taken an Economics class, you’ve likely heard of Nobel Prize winning economist, F.A. Hayek. In his book published in 1976, Denationalization of Money -The Argument Refined, Hayek imagines a world in which currency is not subject to the whims of government, but to that of the competitive market. To clearly explain this scenario, the economist created his own privatized currency to solve for monopolization of money by governments. In theory, the pressures of a competitive market would promote the creation of a currency with better stability and solvency than a government currency could provide.

Qiao Wang’s article shows there are clear connections between cryptocurrency and Hayek’s “Ducat” currency, particularly in reference to Stablecoins. Both Stablecoins and the “Ducat” present similar approaches to solving for stability, mainly by employing creation/redemption mechanisms via smart contracts to control for the respective currency’s deviation from its intended price. However, stability mechanisms don’t necessarily provide solvency.

If F.A. Hayek were alive today, he’d likely be intrigued with the focus of stability within cryptocurrency. Yet, Hayek’s “Ducat” had one main constraint: at any moment, “Ducat” holders would be permitted to exchange their coins for fiat at a determined fixed rate. To comply with this condition, well developed, smart monetary policy must be implemented to amass the capital necessary in the case of a wide-spread run on the currency. As it’s impossible to ensure the success of any currency, why invest if there’s no guarantee you’ll have constant access to value-storing fiat currency?

Observing the notable Stablecoins currently on the market, none have completely solved for the issue of maintaining the unrestricted ability to exchange their cryptocurrency, at a fixed rate, for fiat. Many claim their currency is a reliable, long-term store of value, but more often than not, this is only partially true.

In my opinion, there are a few reasons why many of these “Stablecoins” are susceptible to failure:

1) Stablecoins that peg their currencies to fiat currencies are invariably subject to inflation, and consequently, subject to volatility.

2) Stablecoins that depend on collateral-backed currencies (cryptocurrencies pegged to other cryptocurrencies) are subject to the volatility of that crypto-asset, which is also likely to be pegged to a fiat currency.

3) Stablecoins that mitigate currency devaluation via the issuance of value-storing entities to remove coins from the exchange, such as bonds or shares, rely on the reckless assumption that the currency will regain value. In the case that the coin is unable to recover, participants are left with unredeemable bonds and loss of capital.

4) Even if bond-utilizing coins regain value, there is no explicit pay out date for bond redemption, leaving bond holders unsure of when they’ll be refunded.

Thus, an ideal cryptocurrency would possess long-term store of value capability without pegging to a fiat currency. Fortunately, the creation of a coin which satisfies those conditions does not appear too far off.

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Published by Stephen Leahy

Managing Director at Oneiro, creators of ndau, the world's first buoyant coin designed and optimized to be the digital long term store of value Former FX Risk & Platforms executive; Founder x 3. The world currently has an electronic veneer on traditional financial services and products. Oneiro is working to move the world to natively digital assets and digital identity. Cras Es Noster!
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